GLOBAL MARKETS WEEKAHEAD - ECB/Fed cock the gun, G20 action eyed

LONDON (Reuters) - For all the kneejerk disappointment that ECB chief Mario Draghi didn't fire the fabled "big bazooka" to instantly neutralise the euro crisis this week, the fact he cocked the gun may yet have transformed world markets' view of euro risks.

Investors next week will have one eye on China's monthly data deluge and another on auctions of "safe" U.S. and German 10-year government bonds. However, uppermost in their minds will be the ECB's step toward both government bond-buying that may be a turning point in the euro saga and launching quantitative easing in Europe to match the United States, Britain and Japan.

Global growth and corporate earnings expectations have already been downgraded sharply over the past month, herding many funds further into top-rated but super-low or zero-yielding government securities. But the prospect of new policy stimuli is now critical for the rest of what could otherwise be a long, hot August.

Not unlike Draghi, whose economic outlook on Thursday also flagged up another ECB interest rate cut soon, U.S. Federal Reserve Chairman Ben Bernanke also held fire this week as the Fed watches a more mixed set of signals from the slowing economy stateside while holding out the chance of further quantitative easing if things deteriorate.

Friday's release of the July U.S. unemployment report showed a surprisingly strong 163,000 gain in July U.S. non-farm payrolls, but a reminder of the underlying economic weakness was seen in a rise in the jobless rate to 8.3 from 8.2 percent.

So, with some analysts now claiming world markets have both a Draghi and a Bernanke "put" - a policy insurance against further sharp deterioration of the economy and markets - many see the threat of August meltdown receding as trading volumes drop as always due to summer holidays.

Some money managers even suspect that global policy action on a wider scale - perhaps coordinated by members of Group of Seven or 20 international groupings - may well now be in the offing, in part to row in behind a solution to the euro crisis that has dogged economic and financial confidence everywhere.

"The markets obviously smell what I smell, and in fact, what anyone who studies what policymakers say closely; there is clearly more coming," said Jim O'Neill, chairman of Goldman Sachs Asset Management - the giant U.S. fund manager with about a $1 trillion in assets under management

"I would not be surprised if there was some form of G7+ or G20 action to support the actions in Europe," he told Reuters, adding that it's possible there could even be some agreement beyond Europe to buy peripheral euro government bonds as long as countries sign up to monitoring programmes.

U.S. Treasury Secretary Timothy Geithner's meetings this week with European counterparts and several top-level meetings and phone calls between European leaders and between them and the White House have only fuelled the sense of coordination.

What's more, China's release of inflation, production, credit and trade data for July next week - particularly if that picture is very weak - could well prompt monetary easing there too that links up with Western policy initiatives as speculation rises about a concerted response to what is now a worldwide slowdown.

To complete the G7 view, the Bank of Japan meets next week too and the Bank of England issues its centrepiece inflation report.

ECB BABY STEP

But it's the ECB's move to offer the prospect of unlimited, unsterilised buying of short-term euro government bonds in return for any country willing to request support and agree to conditions on budgetary controls that alters market behaviour.

UBS strategist Manik Narain reckons the major change of thinking on global markets sparked by the ECB was how they would read euro news.

To date, investor fear of a Spanish or Italian request for support has typically encouraged them to shy away from all relatively risky assets and herd in to safe-haven bunkers. But if a request for support now unleashes ECB bond-buying and effective QE, then that transforms "event risk", said Narain.

"The best-case scenario now for world markets is if Spain and Italy now sign up to a support programme that allows the ECB to kick into action," he said. "The ECB has taken at least a baby step toward a Fed approach of firing bazookas and will be a much more potent influence on world markets now as a result."

Spanish Prime Minister Mariano Rajoy said on Friday Europe could no longer accept the wide differential in government borrowing costs within the euro zone and stopped only inches short of openly seeking sovereign support.

Market reaction to Draghi's press conference on Thursday was initially one of disappointment given the ECB chief's previous remarks on how the central bank would do everything to defend the euro had stoked so much talk of immediate action.

But world markets have for the most part retained much of their net gains over the past week or so.

World stocks are still up more than 3 percent from where they were before Draghi spoke on July 26 and emerging market equities are still up 5 percent. Euro stocks are still up more than 8 percent over that period and the euro is still up more than a cent on the dollar.

But the critical measure in Europe is Spanish and Italian bond yields.

At 7.02 percent, 10-year Spanish yields are still down about 50 basis points while the shorter-term 2-year yields that the ECB was most explicit about on Thursday were down a massive 250 basis points to their lowest in a month.

Italian 2-year bond yields, meantime, were almost down more than 200 basis points to 3 percent - their lowest since mid-May.

With such momentum now behind these markets and the threat of more policy action implied, there will be growing questions about how much more 10-year U.S. and German government paper with yields of 1.5 percent or less investors will be prepared to buy when both come to auction next Wednesday.

Reuters July asset allocation polls this week showed investors holding more of these "safe-haven" bonds in their portfolios than at any time since January 2010.

The question for many is whether there is now as much risk being in these bunkers as there is anywhere else.